The GCC’s historic moment

Despite some early, high profile teething problems, the GCC customs union appears, on balance, to be working. Challenges remain, however.

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By  David Ingham Published  January 30, 2003

Early teething problems|~||~||~|The historic GCC customs union came into effect last month and it wasn’t long before some teething problems were experienced. Within just a few days of the official start date of January 1, it was reported that sixty trucks were stuck at the Al Batha border point awaiting permission to enter Saudi Arabia, despite having paid customs duty in the UAE.

Under the terms of the GCC customs union, goods entering the GCC pay 5% duty at the point of entry and can then move freely throughout the six member states. Duty free access is allowed on locally made goods moving between GCC states if a GCC citizen owns 51% of the company and the product is deemed to have had 40% of its ‘value added’ within the GCC.

In the above example, Arabian Business was able to track down six grounded trucks to Al Futtaim Logistics. According to Guy Duriau, business development manager at the company, the border had not been informed that the union had come into effect. “Based on the information I got, the border has not been informed fully by Riyadh. It is a pity… that these things happen. Perhaps it could have been avoided,” said Duriau.

The trucks, he added, carried “everything which is allowed into Saudi Arabia, and nothing that is banned.”

“It symbolises the lack of coordination between the different customs agencies,” commented Johnny Abedrabbo, a senior economist at National Commercial Bank. “They actually agreed on the customs union but they haven’t communicated the rules and regulations to their employees. That’s the problem.”

Although this incident attracted plenty of headlines, other observers report that things are generally going surprisingly well and that importers and customs authorities are all coming up with their own ways to smooth the transition to the union. According to Michael Vosper, operations director at Tech Data, a distributor of IT products, Dubai Customs has come up with its own innovative way of avoiding the double taxation problem.

“Dubai Customs has said that it will continue to collect duty for road shipments, but that if you bring back documentation from Saudi it will refund the duty that you paid to it,” he explains. So if you end up paying 5% duty at the Saudi border having already paid it in Dubai, the authorities in Dubai will give back the money you paid to them.

Bahrain is also reported to have come up with a smart solution to the double taxation issue. Goods coming into Bahrain that are destined to enter Saudi Arabia via the causeway will not be taxed, although, technically, they are supposed to be taxed at the point of entry to the GCC. “Their attitude is that Saudi is just down the road, so they will let Saudi customs sort it out,” explains Vosper.

Other reports, which couldn’t be confirmed, suggest that Dubai Customs is also giving duty exemptions to freight forwarders that can prove shipments are being forwarded to another Gulf destination. “Everyone is trying to follow the spirit of the customs union,” says Vosper. “The great thing is that people aren’t just sitting down and saying this will take three years to work out, they’re working out solutions at a local level.”
||**||Benefits expected, but challenges remain|~||~||~|
Aside from the union’s teething problems, importers such as Tech Data are expecting some very tangible long term benefits. Vosper says that he is looking forward to a, “levelling of the playing field” and, in particular, to the fact that all importers will have to pay the official duty rate of 5%.

Asked why some importers might not pay the full rate, he replies, “One [reason] is undervaluing, which Tech Data has never done. The other is under collection of duty, where you would invoice somebody for 5% duty, but would collect only 3%.”

Reading between the lines, that means that some importers may have been lying about the value of their shipments, and that some customs authorities have been undercharging importers to make their container and cargo facilities more competitive. “A federal organisation in the UAE will [now] monitor each emirate,” says Vosper. “If you look at the experience of the European Union, it has never fully eliminated fraud from duty, but it is certainly going to be drastically reduced.”

In an effort to help overcome customs fraud, Tech Data has issued a statement saying that it is prepared to open up its shipment records and databases to regional authorities. This would allow customs officials to access price lists directly so that they could be more efficient in the collection of revenue and perhaps spot under invoicing. “With a little work and co-operation, we can now bring an end to practises such as under-invoicing that are draining the industry and governments alike of their rightful revenues,” said Tech Data’s managing director, Steve Lockie.

In the long term, the customs union may well bring plenty of positives, but there are still problems to be overcome. One very live issue is the status of Saudi companies that are protected by royal decree from paying duty.

The UAE does not recognise the duty exempt status of these companies and will tax imports destined for these companies if they pass through its border controls. How the issue will be resolved remains to be seen.

There is also the question of Kuwait, whose boisterous parliament hasn’t yet ratified the customs union. At the time of writing, Kuwait is recognising the payment of 5% duty elsewhere in the Gulf, but only collecting 4% if goods are entering the GCC there for the first time.

In the meantime, Al Futtaim’s Guy Duriau is looking forward to the complete abolition of customs checks in the GCC. “If there is unification, then in fact all the borders and customs offices should be closed like in Europe,” he says. “There could be customs checks and controls, but there should not be any long stops any more at the borders.”||**||

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